If you read my recent article, then you already know that the Department of Labor is proposing revisions to the Fair Labor Standards Act’s overtime exemptions applicable to white collar employees, i.e., those subject to certain exemptions from the federal minimum wage and overtime requirements. You also understand that the salary threshold for an employee to remain “exempt,” i.e., not entitled to overtime for hours worked over 40 per week, will likely be raised from $455 per week ($23,660 annually) to $970 per week ($50,440 annually) in 2016. In other words, you understand that the proposed rule changes more than double the annual salary required for an employee to be exempt from the FLSA’s requirements.
What is less certain – are your employees among those “white collar” workers to whom this salary change will apply? Short answer: if you have any employees who you currently consider exempt from the FLSA, this rule touches your business in some capacity. Specifically, the proposed rules will impact administrative, professional, executive, outside sales, and computer employees in different ways. In fact, the title of the proposed rules is “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees.”
How do you know if your employees fall into one of these categories? First, remember that job title does not equate to exemption. In order to be free of the FLSA’s overtime requirements, these specific employees not only must be paid a certain threshold amount (with the exception of teachers, physicians, judges, lawyers, academic administrative personnel, and outside sales workers – more on this later) but also, they must satisfy the below tests:
- Primary duty is management of the organization or one of its recognized departments of subdivisions;
- Customarily and regularly direct the work of two or more employees; and
- Have the authority to hire or fire other employees, or have his or her recommendations as to hiring, firing, promotion or other change of status be given particular weight.
- Primary duty of office or non-manual work directly related to management or general business operations of the employer or employer’s customers; and
- Perform work requiring the exercise of discretion and independent judgment on matters of significance to the employer
- Primary duty must be the performance of work requiring advanced knowledge, defined as work that is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment;
- The advanced knowledge must be in a field of science or learning; and
- The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.
Computer Professional Exemption (subcategory of the Professional Exemption):
- Must be employed as a computer systems analyst, computer programmer, software engineer or other similarly skilled working in the computer field and performing the following primary duties:
- The application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications;
- The design, development, documentation, analysis, creation testing or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications;
- The design, development, documentation, testing, creation, or modification of computer programs related to machine operating systems; or
- A combination of the aforementioned duties, the performance of which requires the same level of skills.
Outside Sales Exemption:
- Primary duty must be making sales, or obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer; and
- The employee must be customarily and regularly engaged away form the employer’s place or places of business
Highly Compensated Employee Exemption: Employee is exempt from the FLSA’s overtime requirements if he or she performs office or non-manual work and makes more than $100,000 per year. When the rule changes go into effect, in order to meet this exemption, an individual must make compensation equal to the 90th percentile of earnings for full-time salaried employees. For reference, this amount in 2013 would be $122,148.
You reviewed the lists, what now? Well, your employees must fall into one of these categories to be considered exempt under the FLSA. In addition, with a few exceptions, they also will have to meet the new salary threshold, i.e., around $50,440 per year, to maintain this exemption. The exceptions:
- Computer Professionals: The proposed rule changes will not affect hourly computer professionals (who must make at least $27.63 per hour under the FLSA); however, they are applicable to salaried employees under the computer professionals exemption.
- Sales Employees: Inside sales employees, which often fall into the executive exemption category, are affected by the salary threshold change. Outside sales employees, however, are not affected because there is no salary level test to qualify as an exempt outside sale employee. However, the proposed rules do impact those within the outside sales exemption, as the DOL is requesting commentary on whether the distinction between inside and outside sales positions reflects the realities of the modern workplace. Additionally, the DOL has expressed concern that it is inappropriate to count commissions toward the salary level requirement for inside sales employees.
- Review the above checklists and be sure that those employees that you classify as exempt are truly meeting the criteria for such exemption.
- Next, evaluate whether the proposed rule changes to these employees’ salaries jeopardize that exemption.
- Now is the time to begin reviewing employees’ salaries to determine if reclassification will be necessary once the new rules go into effect. At present, the DOL is evaluating what, if any, modifications to make to the proposed rules. I anticipate that the final rules would go into effect a few months after announced. If you need assistance reviewing your employees’ job duties and salary level to ensure FLSA compliance, contact me.